Abstract
This paper uses a unique database that includes deal and bank balance sheet information for 220 cross-border acquisitions between 1996 and 2003 to analyze the characteristics and performance effects of international takeovers on target banks. A discrete choice estimation shows that banks are more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. Post-acquisition performance for target banks does not improve in the first 2 years relative to domestically-owned financial institutions. This result is explained by a decrease in the banks’ net interest margin in developed countries and an increase in overhead costs in emerging economies.
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Notes
Micco et al. (2007) show evidence on performance indicators divided by type of ownership. Berger et al. (2005) use a sample of Argentinean banks to determine the static and dynamic effects of corporate governance. The authors find that foreign-owned banks perform worse than domestically-owned banks, but their performance is significantly better than that of state-owned banks.
The formal version of the global advantage hypothesis states that some banks perform better both at home and abroad. In this paper, I assume that banks that acquire targets abroad perform better than all other banks in their home-country (see Focarelli and Pozzolo 2001). Hence, I test a restricted version of this hypothesis and focus only on the performance of the targets after being acquired by the foreign banks.
Demirgüc-Kunt et al. (2004) do a cross-country comparison of the link between regulation and national institutions and bank overhead costs and interest margins.
For a theoretical explanation of banking M&A’s, see Milbourn et al. (1999).
These authors argue that there are several shortcomings in the empirical methods used in these performance studies, and recommend more M&A case-study analyses.
In robustness tests, I include a measure of risk proxied by the volatility of the ROAs. I exclude this measure from the final estimation because it is time invariant. The main results are robust to the inclusion of this variable.
Bank concentration is measured as the share of the three largest banks by country and year. We use this measure because of data constraints. One popular measure of bank concentration is the Herfindahl-Hirshman index. To estimate it I would need data for all banks in all countries in the sample. Another widely used measure of bank competition is the Panzar and Rosse H-statistic. Apart from the strong assumptions needed to estimate it (see Goddard and Wilson 2008, unpublished manuscript), the small number of banks with information in some emerging economies restricts the number of deals and countries that could be included in the sample.
Although these three measures of financial market size are somewhat correlated, the cross-country differences might be important in the bank’s decision-making process to enter a particular country through a cross-border acquisition. Equity market capitalization is not correlated with public bond market capitalization, while the correlation with private bond market capitalization is under 0.2.
The Sign Test is used instead of the t-test because the sample distributions of the relative—differenced with respect to the country index—accounting ratios are skewed. This would make the use of parametric techniques inappropriate. See “Section 4.”
The Cost to Income Ratio is defined as Overhead costs divided by Net Interest Revenue and Non-interest Income.
These variables are all divided by Average Assets. This measure is calculated by averaging Assets using t and t − 1 information.
Berger et al. (2004) use similar variables to analyze exports and imports of financial Foreign Direct Investment (FDI) across countries.
There are five legal origin categories: British, French, Socialist, German and Scandinavian.
Similar GDP and Similar GDP PC are equal to \(1 - {{\left[ {abs\left( {X_j - X_h } \right)} \right]} \mathord{\left/ {\vphantom {{\left[ {abs\left( {X_j - X_h } \right)} \right]} {\max \left( {X_j ,X_h } \right)}}} \right. \kern-\nulldelimiterspace} {\max \left( {X_j ,X_h } \right)}}\), where X is defined as GDP in the former case and GDP per capita in the latter.
This paper focuses on Commercial Banks due to their central role in retail banking in emerging economies. In addition, some Bank Holding Companies are included due to their similarities to Commercial Banks, especially in countries different from the US. I use unconsolidated financial statements when available (codes U1 and U2 in Bankscope).
A bank is considered to have extreme financial information if Equity to Total Assets, Non-interest Income or Net Loans to Total Assets are less than 0. I also exclude observations with Net Interest Margins below −2.5 or above 28; ROA less than −10 or more than 12; ROE less than -100; Cost to Income Ratios below 0 or above 244; Non-interest Expenses to Average Assets above 100.
Panama is an international financial center.
Some countries are listed with zero cross-border deals. Cross-border acquisitions did take place in these countries, but due to extreme values in the financial data of the targets these observations, and the deals, were excluded.
For these estimations I use bank data from 1994 to 2004.
As a robustness check, I use the Investment Profile measure from the International Country Risk Guide (ICRG). Although it is a more general measure of the overall restriction on cross-border investments in a country, its inclusion does not change the main results.
For a discussion on market-based and bank-based economies see Demirgüç-Kunt and Levine (2001).
Estimations in this section include privatizations. They represent about 22% of the sample (23 deals). Excluding these deals does not change the main findings.
Estimations using matched pair controls instead of industry indices yield similar results.
Bayraktar and Wang (2004) show that there is a decrease in Net Interest Margins, Non-interest Income and profitability as foreign banks increase their share in the local banking sector. This is true for countries that liberalized the stock market first. See also Demirgüç-Kunt and Huizinga (1999) for cross-country evidence on net interest margins and profitability.
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Acknowledgements
I would like to thank the editors of the special issue Robert DeYoung, Douglas Evanoff, Phil Molyneux, and two anonymous referees. I am also grateful to Charlie Calomiris, Elijah Brewer III, Juan J. Cruces, Dale Henderson, seminar participants at the International Finance Workshop at the Federal Reserve Board, the LACEA-LAMES annual meeting in Bogota, Colombia, the conference on “Mergers and Acquisitions of Financial Institutions” at the FDIC, and the annual meeting of the Midwest Finance Association in San Antonio, Texas. The usual disclaimer applies. The views in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
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Correa, R. Cross-Border Bank Acquisitions: Is there a Performance Effect?. J Financ Serv Res 36, 169–197 (2009). https://doi.org/10.1007/s10693-008-0043-6
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DOI: https://doi.org/10.1007/s10693-008-0043-6